Former Bank of Japan governor challenges the current monetary policy consensus. - Politics Forum.org | PoFo

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#15269074
In Bill Mitchell's blog today, Bill wrote.
In the latest IMF Finance and Development journal (March 2023), there is an interesting article by the former governor of the Bank of Japan, Masaaki Shirakawa – "It’s time to rethink the foundation and framework of monetary policy". It goes to the heart of the complete confusion that is now being demonstrated by central bank policy makers. With their ‘one trick pony’ interest rate attacks on inflation, not only have they been inconsequential in dealing with that target (the so-called price stability responsibility), but, in failing there, they have undermined the achievement of the other central bank target (financial stability) and probably worsened the chances of sustaining the third target (full employment). Sounds like a mess – and it is. We are witnessing what happens when Groupthink finally takes over an academic discipline and the policy making space. Blind, unidirectional policies, based on a failed framework, steadily undermining all the major goals – that is where we are right now. And not unsurprisingly, those who have previously preached the doctrine are now crossing the line and joining with those who predicted this mess. And, as usual, the renegade position is somehow recast as we knew it all along’ when, of course, they didn’t.


Bill writes that monetary policy doen't work, anywhere; and fiscal policy does work, at least in Japan.

He goes on to say,
. . snip out alot . .

Dare mention the idea that governments should use fiscal policy to reduce unemployment or provide cash transfers to the poor to lift them out of poverty and the screams were/are deafening. All the noise about insolvency, skyrocketing interest rates, bond market retaliation, inflation and intergenerational debt burdens reached/reaches crescendos whenever that sort of fiscal policy use was/is suggested. But enter a bank in trouble and the fiscal largesse in the trillions can’t get out the door quickly enough.


Of course, I see that as the rich getting richer by keeping/making the poor desperate, and then the rich getting bailed out whenever they need it. However, the rich don't really need it to remain rich, they just need it to avoid losing any money, when or because they screw up.

https://billmitchell.org/blog/?p=60731#comment-126195

The link to the article by the former BOJ Governor
https://www.imf.org/en/Publications/fan ... -shirakawa

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Last edited by Steve_American on 23 Mar 2023 02:06, edited 3 times in total.
#15269101
In my opinion, trying to keep interest rates down in an economy is a very inefficient economic tool. It is expensive to try to keep interest rates down, and very expensive. It creates inflation (or at least inflationary pressure).

Maybe a more targeted approach might be better, like programs making lower interest rate loans to certain segments of the economy.


For those not aware, it costs a lot of money for a Central Bank (such as "the Fed", in the U.S.) to try to keep holding rates down, especially in the face of inflationary pressures. This creates even more inflationary pressure.

(explanation: reason it "costs money" and is "expensive" is because the main way they "lower interest rates" is by making out loans, at an interest rate below what the market interest rate is)

In other words, the difference between the interest rates the Central Bank is trying to set and the interest rates that the free market wants - which is itself very much influenced by the inflation rate - is going to add to the inflation rate.

If the Fed is trying to hold down the interest rate, that will create inflation. And then if the Fed continues to try to hold down the interest rate when there is already lots of inflation, that will create exponential inflation. Sort of like a death spiral.

So there is going to be pressure on the Fed to have to raise rates. It's not all just something that the Central Bank will just be able to "choose".
Last edited by Puffer Fish on 22 Mar 2023 13:40, edited 3 times in total.
#15269102
According to the Keynesian theory of economics, government should spend more during the bad times, and spend less during the better times.

The problem is, the U.S. did not cut spending or save during the better times. This is going to make it more difficult to increase government spending during bad times. The U.S. already has an inflation problem. It is going to get worse if the country is going to try to increase spending to try to counter an economic downturn... and nearly impossible if that economic downturn is being itself fueled by inflation.

The country's debt is so high right now that if the U.S. continues to borrow more money, most of that borrowed money is going to just turn into inflation. The Federal Reserve has been the one printing more money to loan to the Treasury. You're not going to find too many private lenders when there is already such a massive amount of government debt in the marketplace already and inflation has gone up.
#15269174
Puffer Fish wrote:According to the Keynesian theory of economics, government should spend more during the bad times, and spend less during the better times.

The problem is, the U.S. did not cut spending or save during the better times. This is going to make it more difficult to increase government spending during bad times. The U.S. already has an inflation problem. It is going to get worse if the country is going to try to increase spending to try to counter an economic downturn... and nearly impossible if that economic downturn is being itself fueled by inflation.

The country's debt is so high right now that if the U.S. continues to borrow more money, most of that borrowed money is going to just turn into inflation. The Federal Reserve has been the one printing more money to loan to the Treasury. You're not going to find too many private lenders when there is already such a massive amount of government debt in the marketplace already and inflation has gone up.


I pretty much totally disagree with PF on almost every point.

Incrasing interest rates now in the US is adding income to some people, income of newly created dollars. According to the theory more income of new dollars just adds to the money supply, so it causes more inflation. [I don't believe this theory, though.]

Increasing interest rates also causess more inflation, because it incrases a cost for many businesses that need to borrow money or that have variable rate loans. These businesses then want to increase their prices to offset that increased cost. If they have monopoly pricing power, then they can easily increase prices, and this causes more inflation.

AFAIK, the Fed never spends dollars it got. It always spends dollars it just created. Therefore, it is not expensive for it to do things. It may be bad, stupid, or inflationary; but expensive it isn't.

AFAIK, the Fed never lends to anyone but banks. Therefore, it is not able to lend to corps to compete with banks to keep interest rates down.

I don't know who taught PF his facts, but AFAIK, whoever it was taught him a lot of BS.

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#15269193
Steve_American wrote:Incrasing interest rates now in the US is adding income to some people, income of newly created dollars. According to the theory more income of new dollars just adds to the money supply, so it causes more inflation. [I don't believe this theory, though.]

What hairbrained theory is that? If one person gets money from someone else, it doesn't create inflation.

Steve_American wrote:Increasing interest rates also causess more inflation, because it incrases a cost for many businesses that need to borrow money or that have variable rate loans.

There's still a cost to that money.
You seem to imagine the Central Bank can somehow magically lend wealth to a business with no economic cost.
Paper is not wealth. The Central Bank cannot create wealth.

Steve_American wrote:If they have monopoly pricing power, then they can easily increase prices, and this causes more inflation.

If they had monopoly pricing power, they would have already increased their prices as much as they were going to before.
This is irrelevant to the equation here.

Steve_American wrote:AFAIK, the Fed never spends dollars it got. It always spends dollars it just created.

When the Fed spends dollars it just created to buy a loan with a below market interest rate, that investment is a loss of money. It is diluting the total share of Reserve Assets the Fed holds relative to how many dollars are outstanding, diluting the value of each dollar, and creating inflation.

This may be a little bit complicated to think about. Maybe I'll start another separate thread to explain it.
The point is they can't make free loans without there being an economic cost.


Steve, you seem to have this idea of magic free something for nothing.
It doesn't actually work that way. I realize it gets a little complicated mathematically to think about.


Steve_American wrote:Therefore, it is not expensive for it to do things. It may be bad, stupid, or inflationary; but expensive it isn't.

When I say "expensive", I mean the Fed has to expand the money supply in such a way that it carries an inflationary effect, and the money supply can never be contracted back to bring inflation back to where it was before.

(Whereas if the loan was made at normal market interest rates, it would theoretically be possible to later put things back the exact same way they were before)


Steve_American wrote:AFAIK, the Fed never lends to anyone but banks. Therefore, it is not able to lend to corps to compete with banks to keep interest rates down.

Still irrelevant. It still gets indirectly loaned to corporations. Those banks take the money and lend it to someone else. Same effect.
#15269198
I'll try to explain it. The thing is, if the Central Bank expands the money supply, to make a loan, that will cause inflation.
The only way it will not cause inflation is if the ratio of what the Reserve Assets are worth, which the Central Bank holds, does not change relative to the amount of money in circulation.

This is pretty basic Central Bank economics. Theoretical, and very basic.

And this assumes everyone knows the Central Bank is going to latter sell off that asset (in this case collect the debt it is owed) to be able to remove those dollars out of circulation.

When the central bank does this, all the asset prices are going to increase a little.

You don't imagine the central bank could just print money to buy an investment asset, pocket the profits over a certain time period for itself, and then sell back that investment asset, and everything would return to normal, do you?

At the end of this, the central bank is going to need to collect those interest rates to be able to take some additional money out of circulation to bring the inflation rate back down to what it was before.

You can do a thought experiment, if you want, and imagine there is no money initially, and then only 1 person in existence. That may help you think about it and see things clearer.

You start with $1 you have created, which you used to buy a barrel of apples.
I have a farm that is worth 100 barrels of those apples. I am getting 2 barrels of wealth from that farm for every given period of time. You want to create your own dollars to buy my farm (or at least hold on to it for a period of time before you sell it back to me). You might calculate that my farm is worth $100 of your dollars. But that is actually a mistake. That is theoretical. That would be before you created $100 to try to buy my farm. You are actually going to have to pay me $102 to buy my farm. That is the break-even point for me, where I neither gain nor lose. And when you sell the farm back to me, I am only going to pay you $100 back.
So if you want everything to return to normal, you are going to have to harvest 2 barrels of apples from the farm while you own it, and sell it.

If you were to lend this money out to someone else so they could buy my farm... Well, hopefully you see.

If you don't want to create inflation, you are going to need to get the normal rate of return on the asset that you bought.

It's common sense. No one is going to sell all their assets to someone else for money (the same amount of money as before) just so someone else can take the normal rate of return on those assets for themselves.

When the Central bank expands the money supply to loan out money, there is going to be a natural increase in asset prices.
And when (or if, theoretically) the Central Bank later tries to remove that money from circulation, the asset prices will go back down. That's where the Central Bank "loses money". Or it won't be able to take back that money it previously put into circulation.
#15269203
Puffer Fish wrote:#1 What hairbrained theory is that? If one person gets money from someone else, it doesn't create inflation.


#2 There's still a cost to that money.
You seem to imagine the Central Bank can somehow magically lend wealth to a business with no economic cost.
Paper is not wealth. The Central Bank cannot create wealth.


#3 If they had monopoly pricing power, they would have already increased their prices as much as they were going to before.
This is irrelevant to the equation here.


#4 When the Fed spends dollars it just created to buy a loan with a below market interest rate, that investment is a loss of money. It is diluting the total share of Reserve Assets the Fed holds relative to how many dollars are outstanding, diluting the value of each dollar, and creating inflation.

This may be a little bit complicated to think about. Maybe I'll start another separate thread to explain it.
The point is they can't make free loans without there being an economic cost.


#5 Steve, you seem to have this idea of magic free something for nothing.
It doesn't actually work that way. I realize it gets a little complicated mathematically to think about.



#6 When I say "expensive", I mean the Fed has to expand the money supply in such a way that it carries an inflationary effect, and the money supply can never be contracted back to bring inflation back to where it was before.

(Whereas if the loan was made at normal market interest rates, it would theoretically be possible to later put things back the exact same way they were before)



#7 Still irrelevant. It still gets indirectly loaned to corporations. Those banks take the money and lend it to someone else. Same effect.


#1 PF, you missed the part where I asserted that it newly creaed money that the Fed used to pay the interest.

#2 PF, you need to reread my post. I said that there are business that already borrowed and have variable interest rates. Those at least go up and so is a new additional cost for that business.

#3 Prove that. Some businessmen have said in public that they are raising prices now because their customers caan't telll if it is necessary or just price gouging.

#4 I don't know what you are talking about here.

#5 And you, PF, don't grok that when people save money it leaves the active money supply, so it can't be used to buy new stuff, and so is not inflationary.

#6 PF, between 1992 and 2019, the Gov. added trillions to the money supply, yet inflation was very low. IMO, this act proves that the theory is not that simple. More money supply does not always cause inflation. It took covid and its supply shocks to spark inflation.

#7 PF, you still refuse to believe that banks are not in any way constrained in the amount they can loan out. The only limit is on the number of credit worthy borrowers who want a loan.
. . I'll explain it again.
1] Banks invest their deposotors' money in safe assets like Gov. bonds, so they can get the cash out to pay depositors if there is a run on the bank.
2] So, banks can't lend out their depositors' money.
3] It was proved by an experiment in 2014 when a Ger. bank lent 200K euros without getting the money anywhere. The loan officier just added (with key strokes) euros into the borrower's acc. Money out of thin air.
4] Yes, a week later the bank will need to meet the Fed reserve requirement of not lending more than 90% of depossits. But, the money has been the banking system for a week; it is still in some bank; it might be the original bank, but money is fungable; if the bank still needs more reserves to meet the requirement, it can borrow in the overnight system or even from the Fed.

So, despite what is said in the media, banks never borrow from the Fed to get money to make another loan. Mostly they can borrow from the bank where their loans ended up deposited to meet the reserve requirement (a week later), only rarely do they borrow overnight from the Fed because the Fed's rate is higher than the rest of the banking system demands.

Just about everything said in the media during/after the GFC/2007 was not true or a major simplification. QE never allowed banks to make more loans or at lower rates. After the GFC, they were not lending because there were many fewer credit worthy fools who wanted big loans.

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#15269210
Puffer Fish wrote:I'll try to explain it. The thing is, if the Central Bank expands the money supply, to make a loan, that will cause inflation.
The only way it will not cause inflation is if the ratio of what the Reserve Assets are worth, which the Central Bank holds, does not change relative to the amount of money in circulation.

This is pretty basic Central Bank economics. Theoretical, and very basic.

And this assumes everyone knows the Central Bank is going to latter sell off that asset (in this case collect the debt it is owed) to be able to remove those dollars out of circulation.

When the central bank does this, all the asset prices are going to increase a little.

You don't imagine the central bank could just print money to buy an investment asset, pocket the profits over a certain time period for itself, and then sell back that investment asset, and everything would return to normal, do you?

At the end of this, the central bank is going to need to collect those interest rates to be able to take some additional money out of circulation to bring the inflation rate back down to what it was before.

You can do a thought experiment, if you want, and imagine there is no money initially, and then only 1 person in existence. That may help you think about it and see things clearer.

You start with $1 you have created, which you used to buy a barrel of apples.
I have a farm that is worth 100 barrels of those apples. I am getting 2 barrels of wealth from that farm for every given period of time. You want to create your own dollars to buy my farm (or at least hold on to it for a period of time before you sell it back to me). You might calculate that my farm is worth $100 of your dollars. But that is actually a mistake. That is theoretical. That would be before you created $100 to try to buy my farm. You are actually going to have to pay me $102 to buy my farm. That is the break-even point for me, where I neither gain nor lose. And when you sell the farm back to me, I am only going to pay you $100 back.
So if you want everything to return to normal, you are going to have to harvest 2 barrels of apples from the farm while you own it, and sell it.

If you were to lend this money out to someone else so they could buy my farm... Well, hopefully you see.

If you don't want to create inflation, you are going to need to get the normal rate of return on the asset that you bought.

It's common sense. No one is going to sell all their assets to someone else for money (the same amount of money as before) just so someone else can take the normal rate of return on those assets for themselves.

When the Central bank expands the money supply to loan out money, there is going to be a natural increase in asset prices.
And when (or if, theoretically) the Central Bank later tries to remove that money from circulation, the asset prices will go back down. That's where the Central Bank "loses money". Or it won't be able to take back that money it previously put into circulation.


This mostly just word salid. I'll just hit a few high points.

1] You admit that the theory is thoretical, meaning not well proved, IMHO.
. . . I keep asserting that even pne faalse assumption in a proof makes it inavlid.
I aos assert that there are many cases in historical data where the opposite happened, so experience refutes the theory.

2] The Fed pays 97% of its revenues to the US Treasury Dept. It doesn't pocket a dime.

3] I doesn't matter at all if the Fed loses money. It can create money to replace losses.

Like I said above, much of what you learned as facts are just BS.

I realize that you are sure that I'm the one spouting BS. It is very bad that the US policy makers agree with you and not MMTers. It is going to destroy the enviroment and end civilization in my step kids lifetime.

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#15269313
Puffer Fish wrote:That creates inflation. Which was the point of what I was trying to tell you.
If you don't get that, then it seems like you didn't understand the gist of what I was trying to tell you.


And, I keep saying that simply adding to the money supply doesn't cause inflation in all cases. For example, IIRC 97% of the money supply in the US came from banks lending money into existance. After this money's 1st use, it is in the economy being used for what all other money is used for, right? Yet, your theory ignores this addition to the money supply when it worries about how additions to the money supply will cause inflation, right?

So, you accept the fact that 97% of the Fed's revenue is paid to the US Treasury Dept.? Good. Progress.

Can you also accept that money that leaves the nation to buy stuff and money saved can't add to inflation? Can you accept that when a bank makes a loan, the dollars created into existance will add to the banking system's total deposits, and so (in a week) will be available to meet the bank's new higher reserve requirement? So therefore, can you accept that, it is false that banks use or need saved money deposited in that bank to meet the reserve requirement of new loans that it wants to make?

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#15269380
Steve_American wrote:And, I keep saying that simply adding to the money supply doesn't cause inflation in all cases.

Well, I'm not going to argue about that in this thread. I've argued this point with you in other threads.

But I will make the point that, if "adding more money" did cause inflation, then lowering interest rates would create irreversible inflation.

Hopefully you can accept that statement, for the sake of argument?

If you can accept that claim, then our disagreement really hinges on the issue of whether printing more money causes inflation, which is another issue.
#15269420
Puffer Fish wrote:Well, I'm not going to argue about that in this thread. I've argued this point with you in other threads.

But I will make the point that, if "adding more money" did cause inflation, then lowering interest rates would create irreversible inflation.

Hopefully you can accept that statement,
for the sake of argument?

If you can accept that claim, then our disagreement really hinges on the issue of whether printing more money causes inflation, which is another issue.


PF, I'm sorry but I don't think I can agree or disagree, because I can't think like you do to grant you the 1st part.

My disagreement with you boils down to my assertion that you have over simplified the causes of inflation to just 1 cause. You have ignored to times in history of the US and other nations, especially Japan, when increasing the money supply didn't cause much change in inflation.

As I see your claim it is like a teeter totter. When the interest rates go down the prices of goods & services in general goes up. That this always happens no matter any other condition. The theory you use does this because it wants to just look at the money supply and interest rates (and maybe other economic things) and never look at the non-economc things like the supply of resources to be used.
. . . And of course, the fact that your theory uses false premises, that it assumes are true anyway, to prove its conclusions. This is never allowed in logic, but economics does it on a massive scale, anyway. [I say 'massive scale' because IMO about half its premises are obviously false.

I keep asserting that there are additional things that influence inflation. These things include; the saving rate, the trade deficit or surplus, the supply of things and energy, etc., the supply of unused labor, the power of labor unions to demand and get higher wages when prices start to increase, etc.

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#15269425
Well, backtracking a little bit, I agree with Bill that fiscal policy is a much better idea than monetary policy.


Heck, I am by no means advocating redistribution of income, but even the bank handing out free money to everyone might be a better idea and more economically efficient than using that same money to subsidize interest rates to go lower. In some situations. Sometimes the policymakers might want to "stimulate" the economy, but incentivizing people to go into more debt might not always be the best way to do it.
#15269426
Puffer Fish wrote:Well, backtracking a little bit, I agree with Bill that fiscal policy is a much better idea than monetary policy.


Heck, I am by no means advocating redistribution of income, but even the bank handing out free money to everyone might be a better idea and more economically efficient than using that same money to subsidize interest rates to go lower. In some situations. Sometimes the policymakers might want to "stimulate" the economy, but incentivizing people to go into more debt might not always be the best way to do it.


A reply l can totally agree with.
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